2011: The year that was... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

2011: The year that was... 

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In this issue:
» RBI went on a rate hike spree
» Govt did a U-turn on important policy reforms
» Euro threatened to destroy global wealth
» But these commodities partied
» ...and more!

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00:00  Chart of the day
As we stand at the end of 2011, we look back to see how the year panned out. Several important events took place that have affected us. One of the most important was how the stock markets fared during the year. Political hassles, global crisis and increased monetary tightening led markets to move like a drunkard for most part of the year. As a result, markets ended the year down by 25%. A performance that failed to enthuse investors both at home as well as abroad.

On a sector wise basis, the sector that emerged as a clear winner was the FMCG sector. Even though inflation rates hurt the margins of the companies in the sector; nevertheless the consumption story remained intact. The sector was the only sector to deliver positive returns during the year. Even though sectors like pharma and technology outperformed the BSE-Sensex, nevertheless they still delivered negative returns overall.

The biggest loser for the year was the infamous realty sector. The sector continued to face poor demand off-take that made debt repayments difficult. At the same time, increased debt burdens, rising interest rates and increasing commodity prices have taken a huge toll on the stock prices in the sector.

Global slowdown led to lower demand for metals which led to a 48% fall in the metal stocks in 2011. Closer home, government inaction, policy paralysis and rising interest rates continued to haunt the economic growth in 2011. The sector that was hit worst due to a combination of these was the capital goods sector which declined by nearly 48% during the year.

All in all 2011 was a rather depressing year for the Indian stock markets. In fact it was the second worst for Indian investors in 14 years.

Data source: BSE

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GDP growth slowed, industrial production numbers contracted, capital market activity declined. The BSE-Sensex was also down since the start of the year. But, this is probably the only graph related to the Indian economy which had a positive slope in 2011. Seven rate hikes were implemented by the Reserve Bank of India in 2011. This followed six in 2010, in an attempt to curb inflation. Now with inflation slowing, the central bank has signaled the end of the monetary tightening by hitting the pause button in December. We are now looking forward to a few rate cuts next year.

Data source: Reserve Bank of India

Every time Indians talk about reforms they need to go back to 1991 for reference point. Reason being, since then there have hardly been any tangible reforms over the last two decades. Barring a few sectoral regulations, India kept piggy backing on the path breaking reforms of 1991 to grow. The phenomenal growth of service sector also helped during this period. Exporting services to booming economies in the West helped India create more employment, improve income levels and boost GDP. But with Western economies themselves walking with crutches, India and its emerging peers can no longer lean on them. China and Brazil have managed to secure their growth so far with manufactured goods and commodity exports respectively. But for India, the growth based on domestic consumption can be far more sustainable and resilient, if some structural reforms find their way through the government corridors sooner.

Unfortunately, the year 2011 which was slated to see some landmark bills getting passed, witnessed the maximum number of days of parliamentary inaction in history. Result being that most policy reforms remained in the backburner. Graft accusations, political high-headedness and vested interests ensured that most bills were not even tabled. Amongst the ones that were, critical reforms like that on FDI in retail and pension seemed to be out of favour amongst politicians. More importantly, the situation is such that India's fiscal problems are on a path of further deterioration thanks to some populist reforms. With such myopic and vote bank governance, India is alienating itself to investors within the country and abroad. We only hope that better sense prevails in the coming year and our politicians find the need to be more accountable to the wants of a growing economy.

If the US subprime crisis sent shivers down the spine of global economy and destroyed wealth worth hundreds of billions of dollars in 2008-09, it was the Euro Zone that was in the firing line in 2011. But there was one major difference we believe. This time around, the authorities were much better prepared and this meant that they were indeed able to take timely action. The process however was not very smooth as consensus building became very difficult in light of the different viewpoints of the member countries. And although the crisis has been averted, it is not over by a long shot. The fate of the Euro Zone and that of trillions of dollars worth of global wealth still hangs by a thread. With the authorities already having used up a fair bit of their ammunition, coming out clean on the other side of another crisis may be nearly impossible we believe. What makes the whole situation even scarier is the fact that economic fundamentals in most parts of the region are still weak.

As we have maintained time and again, gold is not a productive asset that generates cash flows, but a form of insurance which can protect an investor from economic and financial disasters. 2011 was a year that saw a chain of debt crises striking the developed world, currency wars, geo-political tensions in the Middle East & North African (MENA) region, high inflation and slowing growth in emerging economies, etc. The global financial markets went topsy-turvy as a result of all the fear and uncertainty. So how did gold perform during this time?

Well, it did keep its promise of being the ultimate 'safe haven'. In the year gone by, while all broad indices on the Indian stock markets delivered negative returns, gold prices rose by 13% in terms of the US dollar. In terms of the Indian rupee, the price rise was close to a whopping 34%. These positive gains are despite the decline in international gold prices post the peak in September when several global investors flocked back to the US dollar on account of the Eurozone crisis. On the other hand, silver prices rose sharply during the first four months of the year but later couldn't keep their stead and declined quite a bit. For the entire year, while in US dollar terms silver prices declined by 6.6%, in terms of the Indian rupee silver prices were higher by almost 13%. We believe that investors should invest a small part of their portfolio in gold as a hedge against the follies of man.

The year 2011 started with much optimism for India Inc on back of buoyant growth in 2010. But as the year progressed things started to take a turn for the worse. Inflation continued to rise which prompted the Reserve Bank of India (RBI) to hike interest rate 13 times since early 2010. Most companies struggled to maintain their margins because of high commodity prices and rising interest rates. Inflation led to higher turnover, but eroded margins as the companies were not able to fully recover the rising input cost from the consumers. And to top it all, India Inc's margins came under further pressure because of the sharp depreciation of the rupee. Many companies which had opted for cheaper foreign loans bore the brunt of the rupee's depreciation. Their net profits went down as they had to reprice their dollar denominated loans to higher foreign currency. Going into the New Year, India Inc may not have much to cheer about. Apart from inflation which is showing signs of cooling down, the rest of the economic indicators point to little hope of improving.

It was a mixed week for the world stock markets. While the developed world except for US showed resilience and ended the week on a positive note emerging markets closed with a negative bias. The US stock markets were relatively flat registering minor losses of 0.6% during the week. As far as 2011 is concerned, the Dow Jones managed to gain 5.5% during the year. The ongoing debt crisis in Europe, rising oil prices and political crisis in Middle East overweighed markets.

The Indian stock markets were down by 1.8% during the week. Bank and Oil & gas stocks led the downfall. It may be noted that in 2011, Sensex lost approximately 25% due to concerns over rising inflation, high interest rates and emerging policy paralysis. It would be interesting to see how 2012 shapes up from here as interest rates have already shown signs of peaking. However, in the next year all eyes would be on the government as far as breaking the policy gridlock is concerned.

Amongst the other world markets, Brazil was down by 1.6% while China was down by 1.4%. However, UK and Japan were up by 1.1% and 0.7% respectively.

Data source: Yahoo Finance, Kitco

04:45  Weekend Investing Mantra
"The investor of today does not profit from yesterday's growth." - Warren Buffett
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8 Responses to "2011: The year that was..."

Sarat Palat

Jan 6, 2012

FMCG sector


Kodiyattu Idiculla Korah

Jan 4, 2012

Very good study . Informative and easy to understand . Best wishes for the years ahead.


harsh vora

Jan 3, 2012

good information and knowledge for investor people


sunil dhyani

Jan 3, 2012

Similar condition will prevail in this year.Geo political specially Iran issue will impact world economy. Chances are that the prices of crude oil goes up further which has bad impact on our economy. Political turmoil may also rises after election in coming month in the four states.


Mohandas Kamath

Jan 1, 2012

Good, splendid and analytic information worth reading.


Ashish Bhargava

Jan 1, 2012

Excellent. Keep it up.


Pawan Kumar Sharma

Jan 1, 2012

2011 was the year of experience to know the behave of share market but this year was worst than 2008 which has failed all the predictions of share market gurus'.



Dec 31, 2011

request you to include banking and NBFCs in the chart for the year....

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